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Obama challenges economic leaders
GLOBAL ‘UNITY OF PURPOSE’
Disagreements loom over G-20 summit
by Howard Schneider and Scott Wilson
President Obama warned world economic leaders in a letter this week that the global recovery could founder on growing divi- sions over issues they pledged a year ago to resolve cooperatively. As a key world summit in To- ronto approaches next week, Oba- ma referred — sometimes ellipti- cally but still unmistakably — to a lengthening list of disagreements among the G-20 group of nations, including China’s overvalued cur- rency and Europe’s suddenly ag- gressive budget-cutting. Instead of meeting in Toronto
to review the progress made toward goals announced last year in Pittsburgh, when there was a buoyant mood of world coopera- tion, the coming session stands as a fresh reckoning. “We meet at a time of renewed challenge to the global economy,” Obama said in the letter, obtained by The Washington Post. He called on the G-20, which includes Chi- na, India, and major European na- tions and whose 20 members ac- count for the bulk of world eco- nomic activity, to “reaffirm our unity of purpose” when “signifi- cant weaknesses” continue in sev- eral of the member countries’ economies. The debate over China is a long- standing one, but Obama’s letter included sharp — though veiled — criticism of the country’s failure to be more aggressive in reducing its reliance on exports. Rebalancing the global economy by reducing large trade surpluses in China and other export powers was a main goal agreed upon in Pittsburgh. But little progress has been made, and China has not allowed its cur- rency to appreciate — the one step many in the United States have awaited as a sign of good faith and away for China to curb its exports by making them more expensive. Obama’s letter did not mention
China by name, but he said he was concerned about “continued heavy reliance on exports by some countries with already large ex- ternal surpluses . . . I also want to
10-YEAR TREASURY UP $5.60 PER $1,000, 3.2% YIELD
CURRENCIES $1 = 90.98 YEN; EURO = $1.238 DIGEST ECONOMY Demand for imports helps widen trade deficit
Higher oil prices and stronger demand for imported goods wid- ened the broadest measure of the U.S trade deficit in the first three months of the year. The result is viewed as a positive step for the recovery. The stepped-up spending on foreign goods and services was a sign of growing confidence among consumers. But economists worry that the
AUTOMOTIVE In survey, U.S. cars beat foreign brands ASSOCIATED PRESS
Containers await shipment at a port in China. China’s reliance on exports has allowed it to sock away trillions of dollars in foreign currency reserves, contributing to the imbalance in the global economy.
“It is critical that the timing and pace of consolidation in each economy suit the needs of the global
economy.” — President Obama, in a letter to world economic leaders
underscore that market-oriented exchange rates are essential to global economic vitality.” In the past year, China and oth-
er Asian powers have helped pull the global economy out of reces- sion — but have maintained the same export-led industrial and currency policies that have al- lowed them to sock away trillions of dollars in foreign currency re- serves, a model that the Interna- tional Monetary Fund and others have encouraged them to change to create a more balanced world system. The differences with Europe
have been stoked by the recent cri- sis over Greek government debt. Greece’s problems led to broader concerns about slow growth and large deficits throughout the con- tinent, and particularly among the 16 nations that share the euro. That has prompted a surge in
budget-cutting plans that the IMF has said are appropriate for the most indebted nations, such as Greece and Spain, but that risk undercutting recovery in coun- tries where government debt is not as urgent a problem and growth remains tentative. France, Germany and England, the driv- ers of the European economy,
have all announced austerity plans.
“I am committed to the restora- tion of fiscal sustainability,” Oba- ma said, “but it is critical that the timing and pace of consolidation in each economy suit the needs of the global economy, the momen- tum of private sector demand, and national circumstances.” The United States is setting budget goals for 2013, for example, but in the interim “will pursue measures to support the recovery in private demand and return the unem- ployed to work,” he wrote. “This is not a time to take our
foot off the accelerator here,” said Vice President Biden, speaking to reporters at the White House. “We still need to continue to create jobs and spur job growth.” Europe and the United States are not totally out of synch. Euro- pean leaders meeting in Brussels on Thursday approved the public release of bank “stress tests” to help clarify the financial health of the continent’s banking system — a step the administration has urged and that Obama broadly referenced in his letter. And they have agreed on the general princi- ples of financial reform, such as better regulation of derivatives
trading and new levies on the fi- nancial sector to help pay the costs of the recent financial crisis. But the Brussels meeting also highlighted the G-20’s elusive hope for unity. Where Obama’s letter empha- sized the need to ensure growth, a statement released by the Euro- pean Union in Brussels spoke of the “major risks” posed if Euro- pean governments don’t quickly cut spending.
Where Obama wants to impose
a new levy on only the largest fi- nancial institutions, the Euro- peans want to pursue a broad, global tax on all financial trans- actions. The statement said Eu- rope “will strongly defend this po- sition” in the G-20.
“If there is no consensus in the
G-20, we go forward,” E.U. Presi- dent Herman Van Rompuy said in a news conference. A senior administration official who spoke on the condition of anonymity because the presi- dent’s letter to the G-20 leaders has not been publicly released said that despite the list of issues, the group is still striving for com- mon ground.
“I think one of the noteworthy
aspects of the last 18 months is that countries didn’t just go their own way,” the official said. “The crisis isn’t over, there are vul- nerabilities and there’s more work to be done in each of these areas. And they will continue to work on that agenda together.”
schneiderh@washpost.com wilsons@washpost.com
Let the hedge funds run the risks B
eginning in the late 1980s, traditional banks began complaining that they were
losing market share and profits and all their best people to in- vestment banks, which had clev- erly constructed an alternative, or “shadow,” banking system that was less regulated and backed by less capital. Their incessant whining and well-financed pleading eventually paid off in the late 1990s, when Congress dismantled the Depression-era wall between the two activities and let banks and investment banks merge. And it all worked splendidly — until, of course, it didn’t. More recently, during the de-
bate about financial regulation, the new megabanks have been complaining that if they are not allowed to continue paying those outlandish bonuses, or if their activities are restricted, or if they are saddled with additional cap- ital requirements and leverage limits, they will lose market share and profits and all their best people to unregulated hedge funds. You see the pattern here. The consistent line from the banks is that because we can’t really stop the things we don’t like — the ex- cessive pay, the conflicts of inter- est, the lack of transparency, the unbridled speculation and mar- ket manipulation — it’s better to have these things go on within banks, where there’s at least a modicum of government super- vision. The problem with this argu- ment is that it wasn’t the un- regulated hedge funds, or for that matter the unregulated de- rivatives markets, that were pri- marily responsible for the finan- cial crisis. Rather, it was the reg- ulated banks that caused most of the problems, mainly when they began to think and behave like hedge funds.
STEVEN PEARLSTEIN
That, anyway, is the conclusion of a splendid new book, “More Money Than God” by Sebastian Mallaby, a former Post columnist and editorial writer. Years before the crisis, Mallaby set out to pull back the veil of secrecy on a cor- ner of the financial world that had become immensely rich and powerful and, in the minds of many, rather menacing as well. If there was to be a financial crisis, many people — including me — were convinced that hedge funds would be at the center of it. Mallaby read just about every- thing there was to read about hedge funds, from newspaper and magazine articles to eye- glazing academic studies. He got his hands on many of the month- ly reports send by fund managers to their investors over the years, and he dug up some revealing transcripts from court cases in- volving the funds. And after sev- eral frustrating years of trying, he finally managed to get exten- sive interviews with many of the most celebrated hedge fund managers and their lieutenants. The result is the definitive his-
tory of the hedge fund history, a compelling narrative full of larg- er-than-life characters and dra- matic tales of their financial tri- umphs and reversals. There’s A.W. Jones, the one- time communist sympathizer and Fortune magazine writer who opened the first “hedged” fund in the 1950s and almost im- mediately produced above-mar- ket returns through the use of borrowed money and short-sell-
ing and a compensation scheme that had Wall Street brokers call- ing him with all their best tips. We learn how young hotshots
such as Bruce Kovner, Louis Ba- con and Paul Tudor Jones turned the art of momentum investing — trend surfing, as they called it then — into something of a sci- ence, confounding theories that it was impossible for any in- vestor to consistently beat the market average. We ride the roll- er coaster with Michael Stein- hardt, Julian Robertson and Stan Druckenmiller, the early giants of the industry. In George Soros, Mallaby finds an intellectual with a keen eye for the self- reinforcing dynamics of finan- cial markets combined with a steely trader who broke the Bank of England by willing to bet his entire stake on a devalued pound sterling. Most fascinating of all are the
rocket scientists and code break- ers recruited by Jim Simon and David Shaw to pore through mountains of financial data in search of the faint patterns in market behavior, or small imper- fections in prices, that could gen- erate steady streams of trading profits for their “quant” funds until others caught on. Mallaby weaves into his narra- tive just the right amount of eco- nomic theory and market his- tory, and he has a wonderful knack for explaining complex trading strategies in simple and elegant prose.
But for me, the most eye-open- ing aspect of Mallaby’s account is
how much energy the hedge funds spend in trying to discover one another’s trading strategies and how ruthless they can be in trying to profit from one an- other’s miscalculations and mis- fortunes. Their obsessive secrecy isn’t a lifestyle choice, it’s a tacti- cal imperative — no less than those huge bonuses, which serve as insurance against defections. Mallaby is a market man through and through, so it should be no surprise that he of- fers a sympathetic account of hedge funds. Despite the book’s title, the book is remarkably non- judgmental about the vast for- tunes amassed by hedge fund managers, and he offers a re- spectful view of their economic role.
But you can’t come away from
“More Money Than God” with- out thinking that there ought to be a bright line between hedge funds and banks in terms of what they do and how they do it. As a general rule, the investment and trading strategies used by hedge funds are inappropriate for a reg- ulated financial institution, and no bank should be taking on the kinds of risks that generate hedge fund-like returns. By the same logic, the kind of people who thrive at hedge funds prob- ably don’t belong at banks — and banks should not be offering the big bonuses necessary to attract or retain them. Indeed, as Mallaby argues, it should be considered progress, not a problem, if regulatory re- form forces some of the riskier fi- nancial activities out of big banks that are considered too big to fail, and into smaller hedge funds that pose little risk to the financial system. If bankers want to lead the exciting hedge-fund life, earning hedge-fund-like profits and bonuses, let them go work for a hedge fund.
pearlsteins@washpost.com
JOE RAEDLE/GETTY IMAGES Spirit resumes flights after pilots’ strike ends
Spirit Airlines planned to operate about 20 flights Thursday and ex- pected to resume full service Friday after its pilots made a deal to end their strike, which started Saturday. Spirit operates about 150 daily flights in the United States, Latin America and the Caribbean. Based in Miramar, Fla., it carries about 1 percent of the nation’s air traffic. — Associated Press
ALSO IN BUSINESS
U.S. urges industry to make win- dow blinds safer: Government safety officials warned window blind and shade manufacturers Thursday that their products — responsible for one child stran- gling each month — must be saf- er or they will face new reg- ulations.
Consumer Product Safety Commission Chairman Inez Te- nenbaum said that manufac- turers must quickly develop safer standards for window blinds and shades. If not, the government will develop its own.
Safer standards could mean more cordless window blinds or window coverings with inacces- sible cords.
Millions of blinds and shades
have been recalled in the past several years, yet advocates say that fatality rates haven’t im- proved much and that the proc- ess for improving designs is slow. House votes for $30 billion small-business lending fund: A $30 billion government fund would be available to community banks to increase lending to small businesses under a bill
Post Tech 6Excerpt from
passed by the House on Thursday as congressional Democrats tried to revive their jobs agenda. House Democrats projected
that banks would use the fund to leverage up to $300 billion in loans to small businesses, help- ing to loosen tight credit markets. Republicans called the bill an- other bank bailout that would do little to increase lending. The bill passed by a vote of 24 to 182. The bill now goes to the Senate. Senators and staff aides said Democrats were a handful of votes short of the 60 required to choke off a GOP filibuster in a key vote looming Friday. Toyota to restart Mississippi au- to plant: Toyota will resume con- struction of a plant in Missis- sippi, hiring 2,000 workers with the goal of building compact Co- rolla sedans by fall 2011, the Japa- nese automaker said Thursday. The plant in Blue Springs,
Miss., has been on hold since late 2008. The move signals that the automaker is looking to move past a recall crisis that sullied its reputation for safety. — From news services
U.S. automakers have sur- passed foreign brands for the first time in a survey that measures the quality of new vehicles. J.D. Power and Associates said
Thursday that owners of cars and trucks made by Detroit automak- ers reported fewer problems on average during the first 90 days of ownership than those built by companies based overseas. It was the first time that has happened in the 24 years the in-
AIRLINES
dustry research group has con- ducted the annual quality study, a closely watched measure of vehi- cles’ durability and reliability. J.D. Power said Ford showed some of the biggest gains in qual- ity among individual brands, moving into the fifth spot. Porsche was the top scorer. Toyo- ta, which has suffered through huge safety recalls earlier this year, dropped from sixth to 21st. — Associated Press
European debt crisis could damp- en demand for U.S. exports. And a stronger dollar would make U.S. goods more expensive overseas. The deficit in the current ac- count increased to $109 billion in the January-March period, com- pared with a revised $100.9 bil- lion in the fourth quarter of last year, the Commerce Department said Thursday.
— Associated Press
FRIDAY, JUNE 18, 2010
voices.washingtonpost.com/posttech FCC to seek public comment on broadband regulation
The Federal Communications Commission voted 3 to 2 Thursday to seek public comment on its legal strategy for asserting greater regulatory authority over Internet service providers. The agency, still reeling from an April court decision that undercut its authority over broadband services, wants to get back on track with its ambitious plans to shape the future of this country’s Internet use and access and has outlined a new legal path for regulating broadband providers. “The FCC has an obligation to move forward with an open, constructive public comment process to ask hard questions, build a record, find a solution, and resolve the uncertainty that has been created,” said FCC Chairman Julius Genachowski. Broadband is now defined as an information service, which means it doesn’t face much FCC oversight. Genachowski’s plan would shift broadband into the same category as phone services, which would trigger closer supervision by the agency. The FCC said it would not subject Internet service providers to the full brunt of regulation that would come with the new classification, instead choosing a “third way” that would apply only some of the rules. Opponents say the FCC is overstepping its bounds and should wait for Congress to clarify the agency’s power. FCC Commissioner Robert McDowell, who voted against the proceeding Thursday, said the rules for phone services aren’t appropriate for “complex 21st-century” Internet service providers.
— Jia Lynn Yang
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